Deutsche Bank details $US5.4b bond buyback

Katie Linsell

Deutsche Bank plans to buy back about $US5.4 billion of bonds in euros and dollars as it seeks to allay investor concerns about its finances.

Deutsche Bank is seeking to bolster confidence after credit-default swaps insuring its subordinated debt rose to the highest since at least 2002, according to data compiled by Bloomberg. The German lender was the largest in at least four years to feel compelled to reassure investors that it has enough funds to service its obligations. Its shares had rebounded more than 10 per cent in late trade on Friday in Frankfurt.

"This is a tool Deutsche Bank can use to reduce the panic," said Roger Francis, an analyst at Mizuho International in London. "It doesn't really address the underlying concern that people have about the bank. They need earnings to pay dividends and subordinated bond coupons and that's where the question marks are."

The cost of insuring the bank's subordinated debt for five years fell 24 basis points on Friday to 484 basis points, after closing in London at the highest level since Bloomberg began tracking the data in 2002. The one-year contracts reached a record high of 551 basis points on Thursday, the data show.

The bank's €1.75 billion of 6 per cent contingent convertible notes redeemable in April 2022 rose 2 cents on the euro to 73 cents up from a record low of 70 cents on Tuesday, data compiled by Bloomberg show. The banks riskiest debt was downgraded by Standard & Poor's on Thursday to four levels below investment grade.

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The offer includes the $US1.75 billion of bonds that the German lender issued just a little more than a month ago, according to the filing. The firms that bought the biggest piece of that offering at 100 cents on the dollar are now being asked to sell them back to the bank at 97.3 cents, according to calculations by Bloomberg Intelligence analyst Arnold Kakuda. The securities were quoted at Thursday for 95.6 cents on the dollar.

"The bank is using market conditions to buy back these bonds at attractive prices and to cut debt," chief financial officer Marcus Schenck said in a statement on the website. "By buying them back below their issuance value, the bank is making a profit. The bank is also using its financial strength to provide liquidity to bond investors in a difficult market environment."

Deutsche Bank is seeking to buy back bonds due between 2017 and 2026, according to the statement. The majority of the securities being accepted for tender mature within five years.

"The bonds they've selected are senior bank bonds with generally relatively short maturities," Gregory Turnbull Schwartz, an Edinburgh-based fixed-income manager at Kames Capital, which manages about £55 billion. "It would be a little surprising that this would be seen as such reassurance, when the rules now require significant amounts of liquidity to be held by all European banks."

The move was expected by investors and may not be enough to reassure them, according to Chris Telfer, a money manager at ECM Asset Management in London, which oversees about $US9 billion.

The selloff spread to other lenders this week and theories abound as to what triggered it, with some traders fretting over falling oil prices, China's economy and negative interest rates. A pullback by some sovereign-wealth funds has also been blamed for lower asset prices.

Measures of risk on banks and insurers in Europe reached the highest since at least 2013 this week. The Markit iTraxx Europe Subordinated Financial index fell 17 basis points to 297 basis points after closing in London on Thursday at an almost three-year high, according to data compiled by Bloomberg.

The move comes just days after Deutsche Bank told investors and staff that it has sufficient funds to pay coupons on its riskiest debt. Co-CEO John Cryan said the bank is "rock solid". Its shares have lost about 34 per cent of their value this year.

Since taking over last year, Cryan has been seeking to raise capital buffers and restore investor confidence in a bank battered by rising compliance costs and losses at its securities unit. The lender last month posted a net loss of 6.8 billion euros for 2015, its first annual shortfall since 2008.

"It's quite a smart move," Christopher Wheeler, an analyst at Atlantic Equities, said in an interview on Bloomberg Television on Friday. "What they've done is said 'look, we're going to put our money where our mouth is and we're actually going to announce the transaction which will obviously benefit earnings.' It's going to boost their capital as well as their shareholders' funds."